3-2-1 Buydown Calculator

3-2-1 Buydown Formula:

Year1 = Rate - 3%, Year2 = Rate - 2%, Year3 = Rate - 1%

Year 1 Rate:

Year 1 Payment:

Year 2 Rate:

Year 2 Payment:

Year 3 Rate:

Year 3 Payment:

Standard Payment ():

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1. What is a 3-2-1 Buydown?

A 3-2-1 buydown is a mortgage financing technique where the interest rate is temporarily reduced for the first three years of the loan. The rate is 3% below the note rate in year 1, 2% below in year 2, and 1% below in year 3, before returning to the standard rate for the remainder of the loan term.

2. How Does the Calculator Work?

The calculator uses the 3-2-1 buydown formula:

Year1 = Base Rate - 3%, Year2 = Base Rate - 2%, Year3 = Base Rate - 1%

Where:

Base Rate — The standard interest rate for the loan
Year1 Rate — Base rate minus 3 percentage points
Year2 Rate — Base rate minus 2 percentage points
Year3 Rate — Base rate minus 1 percentage point

Explanation: The calculator computes monthly mortgage payments for each year of the buydown period using standard amortization formulas.

3. Benefits of a 3-2-1 Buydown

Details: This buydown structure helps borrowers manage initial payments, making homeownership more affordable in the early years when expenses are typically highest. It can be particularly beneficial for first-time homebuyers or those expecting income growth.

4. Using the Calculator

Tips: Enter the base interest rate (%), loan amount ($), and loan term (years). The calculator will show you the reduced rates and payments for the first three years along with the standard payment for comparison.

5. Frequently Asked Questions (FAQ)

Q1: Who typically pays for a buydown?
A: Buydowns can be paid by sellers as an incentive, by builders to move inventory, or by borrowers themselves to secure lower initial payments.

Q2: Are buydown costs tax deductible?
A: Points paid for a mortgage buydown may be deductible as mortgage interest, but you should consult a tax professional for your specific situation.

Q3: Can I refinance during the buydown period?
A: Yes, but you may lose the benefit of the prepaid buydown costs, so consider timing carefully.

Q4: Are there different types of buydowns?
A: Yes, besides 3-2-1 buydowns, there are also 2-1 buydowns (two years of reduced rates) and temporary buydowns with different structures.

Q5: Is a buydown right for everyone?
A: Buydowns work best for borrowers who expect their income to increase over time or who need temporary payment relief but can afford higher payments later.